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Software not soft on fraud

As crime increasingly becomes the domain of organized gangs, crime fighters of all stripes are deploying ever-more-powerful technology to discover and break down their shady operations.

Credit-card firms, for example, rely on software that’s extraordinarily skilled at mining vast piles of granular data for suspicious buying patterns. I was refueling my car at a gas station in Washington, D.C., where I live. The pump apparently refused my card because the gas station was located about half a mile outside of the cluster of stations I normally frequent.

The same card refused my purchase at an athletic-clothing store in downtown D.C. likely because I normally shop uptown. So it was no surprise that my alert credit-card company recently called me at my office in D.C. to ask whether I’d just purchased baby clothing in Riyadh, Saudi Arabia.

The software was remarkably sensitive at detecting minutely deviant buying patterns. And it caught those anomalies in real time, down to the second. Unreal.

Insurance fraud fighters are seeking the same technological edge. Insurers as a whole have yet to reach the remarkable sophistication of credit-card companies, but they’re working steadily in that direction.

They need to. Organized gangs are infiltrating the insurance fraudscape with growing force. I no longer blink when I read about a $50-million or $75-million Medicare scam. A staged-crash gang in New York allegedly tried to steal $400 million from auto insurers. Many of these same gangs are probably trying to work over credit-card companies, banks and other enterprises.

The encouraging part is that that nearly half of insurers use advanced fraud-catching software such as predictive analysis, text mining and datamining. The discouraging part is that nearly half of insurers don’t use these tools.

That’s one conclusion that can be drawn from a new study of insurer use of technology. It was conducted by the Coalition, with assistance from the business analytics company SAS.

Software of this high-impact ilk is capable of near-miraculous work by today’s standards. Predictive analysis in theory can catch suspicious insurance transactions in real time − instead of waiting until the insurer has paid the claim and the trail is growing cold. Text mining can pore through volumes of relatively mushy data such as an adjuster’s sketchy field notes.

The insurers who use these tools are better armoring themselves against false claims from serious criminal elements who are making a graduate-degree science of scamming. It’s a science that’s raising premiums for honest policyholders. These insurers have made an institutional decision that fraud is a significant enough drain on their and their policyholder resources to require this level of technology.

Not all insurers routinely face a caliber of crime that requires the often-expensive investment in such software. But with several thousand insurers in the U.S., it takes little imagination to conclude that more than a few insurers could and should use these tools but have yet to reach that needed decision. That’s the discouraging part.

The Coalition’s study tells us other things about insurer mindsets regarding technology, and the crime it’s supposed to catch. A large swath of insurers are wide awake to the oncoming peril of organized crime: More than half say the chief benefit of technology is to catch such fraud rings.

Nearly all insurers use at least some form of anti-fraud software.

Predictive modeling and text mining are the top two areas in which insurers plan to invest in the future. But one of the thorniest barriers to fully investing in technology involves how to prove these tools are worth the investment, the insurers say. How do you quantify, for example, the value of dishonorable claims that are never made because some criminals don’t want to take on an insurer that’s known to be so well-defended?

Insurers as a whole may still be playing catchup with their brethren in the credit-card industry. They need, with growing urgency, to step up the pace. But the encouraging part is that more insurers appear to be taking those steps against a criminal underworld that grows more sophisticated and greedy with each passing month.

About the author: Jim Quiggle is director of communications for the Coalition Against Insurance Fraud.